Hedging a position

Options can also be used to hedge against positions already held in an equity portfolio. If you´re concerned that the market may fall over the next several months, but don´t want to sell the stocks in your portfolio, you can acquire "portfolio insurance" by purchasing index put options. In the simplest terms, put options will rise in value when the underlying index falls in price. Therefore, some or all of the losses sustained due to the decline in value of the stocks in your portfolio are offset (or partially offset) by the increase in value of the purchased put option.